The Surprising Buy Case For Barclays PLC

Today I am looking at how explosive dividend growth in coming years is set to propel shares in banking giant Barclays (LSE: BARC) (NYSE: BCS.US) higher.

Dividends ready to rocket higher

In my opinion, Barclays is an excellent stock pick owing to its stunning dividend prospects. The bank has rebuilt its progressive dividend policy after the implications of the 2008/09 global banking crisis forced it to slash shareholder payouts, and the City’s number crunchers expect a backdrop of rocketing earnings to underpin exceptional dividend growth from next year onwards.

Investec expects last year’s dividend of 6.5p per share to be matched in 2013, although the broker anticipates payments rising to 12.5p and 17.5p in 2014 and 2015 respectively. Dividends for these years carry yields of 4.6% and 6.4% respectively, an eye-watering prospect when viewed against a yield of 2.4% for the current year.

And these appetising payout prospects are set to push Barclays into pole position for investors seeking excellent dividend income. According to Investec, for 2015 Lloyds Banking carries a 4% yield on an anticipated 10p per share dividend, while Royal Bank of Scotland‘s dividend of 10p per share boasts a 2.7% yield. Indeed, Barclays even usurps perennial income-buster HSBC, whose projected payment of 41p per share for 2015 carries a 6.1% yield.

At face value, these heady dividend projections for Barclays may appear overblown given historical yields. However, the bank’s forward projections are underpinned by solid reported earnings per share growth (EPS) from this year onwards. Investec expects the bank to swing from losses per share of 5.1p in 2012 to EPS of 11.7p in 2013. A 121% increase is pencilled in for next year, to 25.8p, with a further 37% EPS advance to 35.4p expected in 2015.

Barclays continues to report stunning progress across all of its key divisions, and reported in July’s half-yearly update that increased activity its crucial Barclays Capital investment banking section saw profit before tax rise 7% to around £2.4bn. The firm also witnessed surging performance in the developing regions of Africa, where it operates in more than a dozen countries, and saw pre-tax profit advance 16% in January-June to £212m.

Combined with Barclays’ ongoing restructuring plan, which is set to deliver further significant cost savings, I believe that the firm is in great shape to deliver strong earnings growth — and with it exciting dividend expansion — looking further down the line.

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> Royston does not own shares in any of the companies mentioned in this article.